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Topics for discussion Topics for discussion today today Preliminary engagement activities Planning process

◦Overview ◦Risk and materiality ◦Audit strategy & audit plan

Going concern & factual insolvencySubsequent Events Fraud, AP Act (if time available)Reporting (if time available)

March 2010 5Advanced Auditing Lecture 1

Preliminary Engagement Preliminary Engagement Activities Activities References:

◦ ISA 220 – Quality Control for Audits ◦ ISQC 1 – Quality Control for Firms◦ ISA 210 – Agreeing the terms of audit

engagements

Objectives of Preliminary Engagement Activities ◦ Related to client

the acceptability of a new client OR Consider the ability to continue as auditors for

existing clients ◦ Provision of a quality audit ◦ Regulatory and ethical considerations

19 February 2009 6Advanced Auditing

Preliminary Engagement Preliminary Engagement Activities Activities Why perform Preliminary

Engagement Activities ?◦Limitation of auditor’s risks by not

accepting unsatisfactory clients Firm’s professional reputation could suffer

Negative publicity (lawsuits; client failures)

◦Types of risks faced by auditor Legal liability

Against the firm because of company failures (= audit failures)

Reputational damage Because of being associated with a particular client


Preliminary Engagement Preliminary Engagement ActivitiesActivitiesStep 1: Perform a Client

Investigation ◦Consider: Independence of Auditor

Overriding requirement of a statutory audit Threats to independence

IFAC Code of Ethics

◦Consider: Integrity of Client Matters to consider include

Business reputation of owners and management Nature of operations Attitude of management regarding interpretation of

accounting standards


Preliminary Engagement Preliminary Engagement ActivitiesActivitiesStep 1: Perform a Client

Investigation ◦Consider: Integrity of Client

Matters to consider include Attitude towards keeping audit fee as low as

possible Indications of limitations of scope of audit work Illegal activities of client Reasons for non-reappointment of previous auditor

◦Consider: Changes to Existing Client Refer above


Preliminary Engagement Preliminary Engagement ActivitiesActivitiesStep 1: Perform a Client Investigation

◦ Consider: Communication with previous auditor In terms of IFAC Code of Ethics

Informed of intention to replace? Permission to discuss client? Has client’s permission been obtained to discuss client?

No?

◦ Consider: financial responsibility of client Ability and willingness to pay audit fee?

◦ Consider: legal procedures in respect of the engagement Does a vacancy exist?


Preliminary Engagement Preliminary Engagement ActivitiesActivitiesStep 2: Determine the auditor’s skills

and competence requirements ◦Does the firm has the necessary

capabilities, competencies, time, and resources?

◦Considerations Knowledge of industry Experience of relevant regulatory or reporting

requirements (or able to obtain such skills) Sufficient personnel with required skills and

competencies Experts available (if needed) Able to meet the audit deadline


Preliminary Engagement Preliminary Engagement Activities Activities Step 3: Establish the terms of

engagement ◦Confirmation of relationship ◦Contractual relationship ◦Removal of any misunderstanding◦Copy of letter to be filed in working

papers ◦Reference: ISA 210 – Engagement

Letters Refer to Appendix 1 for example of an

engagement letter


Planning: An Overview Planning: An Overview Obtaining an understanding of the

entity, including internal controls Assessing the risk of material

misstatement in the financial statements

Determining materiality Establishing the overall audit

strategy &Developing the audit plan

March 2010 Advanced Auditing Lecture 1 13

Audit Risk and Materiality Audit Risk and Materiality AUDITING NOTES:

◦ Chapter 7. Important Elements of the Audit Process- Concept of Materiality and Audit Risk.

SAICA HANDBOOK:◦ ISA 240: The Auditor’s responsibilities relating to fraud in

an audit of financial statements. ◦ ISA 315: Identifying and assessing the risks of material

misstatement through understanding the entity and its environment.

◦ ISA 320: Materiality in planning and performing an audit. ◦ ISA 330: The Auditor’s responses to assessed risks. ◦ ISA 450: Evaluation of misstatements identified during the

audit◦ ISA 510: Initial audit engagements – opening balances. ◦ ISA 520: Analytical Procedures.

11 Feb 201014

Advanced Auditing

Audit Risk : the aAudit Risk : the auditor’s uditor’s objective objective

Identify and assess risks of material misstatement ◦ High, Medium, Low

Risk may be due to ◦ FRAUD (ISA 240) or ERROR

2 Levels of risk ◦ Financial Statement level AND Assertion level

How?◦ By obtaining an understanding of entity and its

environment, including internal control Why?

◦ Provides a basis for designing and implementing responses to assessed risks of material misstatement

11 Feb 2010 Advanced Auditing 15

Audit Risk Audit Risk

Definition of Audit Risk ◦ The risk that the auditor expresses an

inappropriate audit opinion when the annual financial statements are materially misstated

◦ Audit Risk is a function of the risks of material misstatement (IR & CR), and Detection Risk (Ref: Glossary of Terms)

Risk-based auditing 11 Feb 2010

16Advanced Auditing

ISA 315 ISA 315 Identification of risks

◦Obtaining an understanding of the entity and its environment, including Internal Control

Assessing identified risks ◦Evaluating whether the risks relate more

pervasively to the AFS as a whole ◦Relating the risks to what can go wrong

at the assertion level ◦Considering the likelihood of

misstatement, and possible magnitude of the misstatement


ISA 315 ISA 315 Significant Audit Risks

◦Risk of fraud ◦Risk related to significant economic,

accounting, or other developments that require specific attention

◦Complex transactions ◦Significant transactions with related

parties ◦Degree of subjectivity ◦Transactions outside normal course of

business for entity


ISA 315 ISA 315 Where auditor revises assessment of

Audit Risk◦Where assessment changes during the

audit Revision of assessment Modification of audit procedures

Documentation required ◦Discussions between audit team ◦Key elements of understanding ◦ Identified risks

FS level Assertion level


ISA 315 ISA 315 The link between ISA 315 and Audit

Risk?A failure to identify factors that may

give rise to the risk of material misstatement (and a failure to respond to such risks) Increase in audit risk

Failure to understand The entity and its environment The accounting system and internal control

systems


The Client Risks The Client Risks “Inherent Risk”

◦Built-in risk that exists before internal controls are put in place!!!

◦Risks related to specific type of industry and type of client

◦Develop assessment by gaining understanding of entity and its environment (A17 – A41) Industry, regulatory and external factors Nature of entity Objectives and strategies, and related business

risks Financial performance of entity

11 Feb 201021

Advanced Auditing

The Client Risks The Client Risks “Control Risk”

◦ A66 Evaluation of design of control involves considering

whether control is capable of effectively preventing, or detecting and correcting, material misstatements.

Implementation of a control means that the entity is using it

No point in testing a control if it is not designed properly

◦ A67 Risk assessment procedures

Enquiry of personnel Observing the applicable controls Inspecting reports and documentation Tracing transactions i.e. Walk-through


The Client Risks The Client Risks Control risk

◦Control activities Control environment – NB!!!

E.g. Management override The entity’s risk assessment process The information system Control activities Monitoring of internal controls

◦Essential to evaluate the effect of the identified weaknesses (in system) on the financial statement assertions

11 Feb 201023

Advanced Auditing

The Auditor’s RiskThe Auditor’s Risk

Detection risk ◦Risk that the auditor will not detect a

misstatement that exists and could be material Risk that is inherent in the client’s

operations and IS NOT addressed by the client’s control system

◦Detection risk is a function of the effectiveness of the auditor’s audit procedures

11 Feb 201024

Advanced Auditing

The Auditor’s Risk The Auditor’s Risk

Detection risk ◦Detection risk may arise because

Inappropriate audit procedure Misapplication of a procedure Misinterpretation of the results of a

procedure

◦There is an INVERSE relationship between risk of material misstatement [IR & CR] and Detection Risk


Assessing risk at two Assessing risk at two levels levels

At financial statement levelWill potentially affect many assertions Factors that may affect audit risk at

the financial statement level Management's integrity

Manipulation of AFS to meet their own needs Management’s experience and knowledge

Errors in AFS Pressure on management

Many business failures in industry Need to raise loans

11 Feb 201026

Advanced Auditing


At financial statement level Factors that may affect audit risk at the

financial statement level (cont.) Nature of entity’s business Factors affecting the industry (→ going

concern problems) Economic conditions Consumer demand for company’s products

Need to consider how these factors will impact on the AFS




At financial statement level – responding to risks ◦Assigning staff with appropriate skills and

experience ◦More supervision of staff ◦Professional scepticism ◦Elements of unpredictability in selecting

items to test, and in the performance of the work

◦Adjustment of nature, timing, and extent of audit procedures → more substantive in nature

◦Use of experts (complex & judgmental areas)


At financial statement level – responding to risks ◦Going concern risks → more

discussions with management, audit committee

◦Focusing procedures on high risk areas ◦Consideration of whether to continue

with the audit



At assertion level◦Risk at financial statement level “trickles”

down, and becomes risk at the assertion level E.g. Poor management integrity

◦Factors that may affect audit risk at the assertion level Susceptibility of an account to misstatement Complexity of transactions Degree of judgement involved Susceptibility of assets to loss or misappropriation Complex and unusual transactions (at year-end) Transactions not subjected to routine processing

11 Feb 201030

Advanced Auditing

Audit Risk Audit Risk

Events and conditions that may indicate risks of material misstatement ◦Appendix 2 of ISA 315

Do NOT learn “off by heart” Understand and be able to identify in a

question Know how to respond to the identified risk


ISA 330 – Auditor’s ISA 330 – Auditor’s responses to risks responses to risks

Design and performance of further audit procedures to obtain sufficient, appropriate audit evidence

Nature, timing and extent of further procedures are based on, and are responsive to the assessed risks of material misstatement at assertion level ◦ Tests of controls ◦ Substantive procedures (AR, Tests of Detail) ◦ Ref: ISA 330 Application and Other

Explanatory Material


ISA 330 – Auditor’s ISA 330 – Auditor’s responses to risks responses to risks

Evaluating the sufficiency and appropriateness of the audit evidence gathered ◦Based on audit procedures performed,

and evidence gathered ◦Need to conclude on whether

assessments of risk of material misstatement at assertion level remain appropriate

◦Does the evidence corroborate or contradict the assertions in the AFS


Risk of Material Risk of Material Misstatement: Fraud Misstatement: Fraud

Misstatement of AFS is INTENTIONAL

Responsibility for prevention and detection of fraud ◦ Lies with management and those charged

with governance ◦ Commitment to culture of honesty ◦ Consider potential for override of controls

Responsibility of auditor◦ To obtain reasonable assurance that AFS are

free of material misstatement – through error or fraud



Ability of auditor to detect fraud depends on factors such as ◦Skill of perpetrator ◦Frequency and extent of manipulation ◦Degree of collusion ◦Size of amounts ◦Seniority of those involved

More difficult to detect management fraud


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Auditor’s requirements ◦Professional scepticism

Irrespective of past experience with client

◦Discussion with audit team ◦Risk assessment procedures


MaterialityMateriality References

◦ ISA 320 – Materiality in Planning and Performing an Audit

◦ ISA 450 - Evaluation of Misstatements Identified During an Audit

Audit report ◦ Auditor’s opinion on whether or not the AFS are

materially misstated

AFS will contain a margin of uncertainty ◦ Where misstatement > acceptable margin of

uncertainty Affects user’s decisions based on AFS Misstatement becomes MATERIAL

11 Feb 201038

Advanced Auditing

Materiality Materiality The nature of materiality

It is subjective Professional judgement is required

It is relative E.g. Coca Cola vs. the corner cafe The balance sheet vs. the income statement

It is qualitative and quantitative Qualitative

Where an amount > amount set as material Quantitative

Judged against a factor other than an amount E.g. Important disclosure that is omitted

11 Feb 201039

Advanced Auditing

Setting of materiality Setting of materiality


Auditor must consider and set materiality during the Planning stage of the audit ◦Planning Stage

Assess the risk of materiality misstatement AND consider planning materiality

Formulate an audit plan Nature, timing, and extent of audit procedures

Planning Materiality Planning Materiality


The relationship between planning materiality and audit risk ◦ Inverse relationship

Higher audit risk Set materiality lower in order to compensate for this

Lower audit risk Set materiality higher Chance of material misstatement going undetected is lower

◦ Inverse relationship between audit risk and materiality Impact on nature, timing and extent of audit

procedures The risk of material misstatement will have a direct

impact on setting of planning materiality levels

Planning Materiality Planning Materiality It is a benchmark against which to

measure quantitative misstatements

Considerations ◦Amount of misstatement

Quantitative ◦Nature of misstatement

Qualitative ◦2 Levels at which materiality is

considered Overall level Individual level

11 Feb 201042

Advanced Auditing

Planning materiality Planning materiality Exam technique – when calculating

materiality ◦Stability of indicators – which figures to

use Budget or actual

Budgeted figures – will these figures be achieved? Un-audited figures of current year – whole year’s

figures? Prior year audited figures

◦ Balance sheet or Income Statement Consider the nature of the business Which would be most appropriate ?

Look at “activity” on B/S and I/S. Who are the users? Would they use the I/S or the B/S

mostly?


Planning materialityPlanning materialityExam technique – when

calculating materiality◦ Calculation

E.g. use of DP6 ◦ Conclusion

Do not leave materiality in a range – need a number!!

Where it is a high risk audit – be conservative Examples

Incentive to overstate assets and understate liabilities

Possible Going Concern Risks related to particular assets, liabilities etc Risks related to the accounting system

11 Feb 2010 44Advanced Auditing

Planning materiality Planning materiality Quantitative indicators of materiality

◦E.g. DP6 Turnover ½ - 1% Gross profit 1 – 2% Net income 5 – 10% Total assets 1 – 2% Equity 2 – 5%

◦Will calculate upper and lower limits of materiality Using lower limit more conservative level of

materiality detection of more errors

11 Feb 201045

Advanced Auditing

Planning materiality Planning materiality Qualitative indicators of materiality

◦Consider when quantifying materiality ◦Examples include

Control environment Effectiveness of internal controls Integrity of management Appropriateness of accounting policies and the

disclosure thereof Statutory requirements and regulations Problems and errors – previous years Results of analytical procedures Possibility of illegal transactions

11 Feb 201046

Advanced Auditing

Final Materiality Final Materiality

Is established at the end of the audit Is the standard against which

identified misstatements are measured, in order to determine the effect on the AFS

Consider responsibilities in terms of reporting responsibilities (ISA 700) ◦Conclusion required by ISA 700 takes into

account auditor’s evaluation of unadjusted audit differences on the AFS (ISA 450)

11 Feb 201047

Advanced Auditing

Final Materiality Final Materiality Planning Stage

◦Assess the risk of materiality misstatement AND consider planning materiality

◦Formulate an audit plan Nature, timing, and extent of audit procedures

Evaluation of misstatements ◦Selected audit procedures are carried out –

on samples of the population e.g. debtors, sales, creditors

◦Errors in samples ◦Draw audit conclusions about the

populations


Final Materiality Final Materiality Process followed by auditor

◦Analyse & project sample errors over the population

◦ If the projected misstatement is unacceptable Perform further tests OR Client to check population in detail for errors

◦Discuss the misstatements with management correction of errors Refusal o correct errors unadjusted

differences use of FINAL MATERIALITY to determine materiality of differences

Misstatement is material more misstatement that acceptable qualification of audit opinion


Final Materiality Final Materiality Why would the client refuse to correct

misstatements ◦Disagreement over whether is a

misstatement E.g. estimate of inventory obsolescence is too low

◦Misstatement not regarded as material I.e. Won’t influence the user

◦Ulterior motives E.g. loan covenant – current ratio required

◦Too much bother to make the changes ◦Not concerned about receiving a qualified

opinion


Evaluating Unadjusted Audit Evaluating Unadjusted Audit Differences Differences

Distinguish between ◦Factual misstatement (known error)

Able to substantiate with audit evidence E.g. sales invoices posted in wrong period

◦Judgemental misstatement (likely error) Unable to specifically quantify and substantiate

with evidence Level of subjectivity E.g. provision for doubtful debts

◦Projected misstatement I.e. Auditor’s best estimate of misstatement in

a population Arises because of use of audit sampling



Considerations ◦Ref: ISA 450 – A16 examples ◦Do not consider differences in isolation

Aggregation of differences Trends identified e.g. understatement of

provisions attempt to manipulate AFS?◦Effect of uncorrected differences related

to prior periods ◦Statutory or other contractual obligations

Less likely to tolerate E.g. maintaining specific ratios in terms of a

loan covenant



Considerations ◦Nature of misstatement

Error in principle VS misallocation of expense Difference arising out of dishonesty of director Subjective differences

◦Impact of misstatement Assess impact on “popular” figures and ratios E.g. where difference affects EPS

◦Absolute size and relative size of difference Absolute size e.g. R1,000,000 Size in relation to other account headings


The Overall Audit Strategy The Overall Audit Strategy

19 February 2009 Advanced Auditing 54

Scope ◦Client-specific issues and circumstances

Number of locations / areas to visit Staff availability Travel and housing of audit staff

◦Engagement team specifics Composition, experience, number QC requirements Use of CAATS

◦Budgeting for the audit Audit time per section Audit fees, expenses



Scope ◦ Communication with entity

Attending meetings Written reports required (and timing) Communication with third parties Previous audit experience

◦ Going concern Applicability of going concern assumption Issues affecting going concern assumption

◦ Previous audit findings and recommendations

◦ Existence of related parties◦ Use of internal auditors, other auditors,

experts



Timing ◦Client dates e.g. inventory counts,

reporting deadlines ◦Timing of audit visits e.g. interim,

final audit ◦Reporting dates

Direction ◦I.e. areas requiring attention

E.g. Debtors

The Audit Plan The Audit Plan


Nature◦Tests of Control (combined approach)

vs. Substantive procedures ◦ Impact of internal controls on

substantive procedures Reliance is justified

Nature – more analytical Timing – verification spread over year Extent – Less

Reliance is NOT justified Nature – more detailed tests Timing – at year-end Extent – more

The Audit Plan The Audit Plan


Timing ◦I.e. when the procedures will be done

Tests of control Performed to cover whole period of reliance

Substantive procedures Performed to verify transactions and year-end

balances Tight audit deadline

Early verification and roll-forward procedures

Extent ◦Relates to number of items to be tested

Greater reliance – larger sample size ◦Sufficient, appropriate audit evidence

Going ConcernGoing ConcernReferences:

◦ Jackson & Stent Chapter 15

Financial statements are normally presented on the “going concern” basis◦Operational existence ◦For the foreseeable future ◦No need to liquidate or curtail operations

Cash is King


Going Concern Going Concern Management’s responsibility

◦to assess whether company has ability to continue as a going concern

Auditor’s responsibility ◦Risk of expression of unqualified

opinion where has been inappropriately applied

◦Need to gather sufficient, appropriate evidence to support adoption (by management) of the going concern assumption


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The Audit Plan for Going The Audit Plan for Going Concern Concern Consideration of going concern starts at

the Planning Stage

Nature, timing and extent of procedures is determined by level of risk perceived by auditor

Nature of testing

◦ Substantive evaluation of directors’ assessment of going concern

◦ Procedures Analytical procedures Confirmation of evidence provided Enquiry of personnel


The Audit Plan for Going The Audit Plan for Going Concern Concern Timing of testing

◦Need most up-to-date information At year-end In post balance-sheet period

Extent of testing◦Determined by “certainty” of

company to continue as a going concern


Going Concern Going Concern References:

◦ISA 570 (Explanatory Notes)

Framework – events and conditions that cast doubt on ability to continue as a going concern ◦Financial indicators ◦Operating indicators ◦Other indicators


Going Concern Going Concern Mitigating factors

◦Consideration of management’s plans to return to going concern Specific and feasible Assumptions made by management Management’s written representations to

commit to plans


Going Concern Going Concern Audit conclusions

◦Based on audit evidence gathered ◦Does a material uncertainty exist

regarding entity’s ability to continue as a going concern? Yes Disclosure in AFS, else AFS don’t

fairly present the state of affairs of the company qualification of audit opinion


Going Concern – audit Going Concern – audit opinionopinionMaterial uncertainty exists

◦Disclosure made Emphasis of Matter para

◦ Inadequate disclosure, or failure to disclose Disagreement “Except for” or Adverse opinion

Going concern is NOT appropriate ◦Adverse opinion

Unable to determine appropriate basis◦Disclaimer of opinion


Factual Insolvency Factual Insolvency i.e. Assets < Liabilities All are fairly valued

Matters for auditor’s attention ◦Indicator of going concern problems ◦Irregularities may take place


Factual Insolvency Factual Insolvency Irregularities

◦Where company is factually insolvent ◦Greater risk of

Common law fraud Reckless trading (S22 of Co’s Act)

◦If taking place Unlawful Act

◦Rest of requirements for S45 RI?


Subsequent Events Subsequent Events Reference:

◦ISA 560 – Subsequent Events

Types of subsequent events ◦Adjusting events ◦Non-adjusting events ◦Dividends ◦Going concern


Subsequent Events Subsequent Events Auditor’s duties

◦Between date of AFS and auditor’s report Identification of subsequent events Audit of subsequent events

◦Between date of auditor’s report but before AFS are issued

◦After AFS have been issued

Refer to page 17/15 March 2010 Advanced Auditing Lecture 1 71

Advanced Auditing 72

S45 – Reportable S45 – Reportable Irregularities Irregularities

Reportable irregularity◦An unlawful act or omission committed by

Statutes, regulations, common law ◦Any person responsible for the mgt of

entity ◦Has, or is likely to, cause financial loss to

the entity, its partner, shareholder, creditor, investor OR

◦Is fraudulent or amounts to theft OR ◦Is a material breach of any fiduciary duty

owed by the person to entity etc

March/April 2009Advanced Auditing

Advanced Auditing 73March/April 2009Advanced Auditing

S45 – Reportable S45 – Reportable IrregularitiesIrregularities

The individual registered accountant ◦ Is satisfied or has reason to believe that ◦A reportable irregularity has / is taking

place MUST ◦Without delay ◦Send a written report to the IRBA, with

particulars ◦MUST notify management within 3 days,

and provide management with a copy of the report

◦ Within 30 days of sending report to IRBA ◦ Discuss report with management » representations

Advanced Auditing 74March/April 2009Advanced Auditing

S45 – Reportable S45 – Reportable IrregularitiesIrregularities

Send another report to the IRBA ◦ No reportable irregularity has / is taking

place OR ◦ Suspected RI is no longer taking place, and

that steps have been taken to recover losses OR

◦ RI is continuing

Where RI is continuing ◦ Notify appropriate regulator ASAP

Details of irregularity In writing Copy of report

◦ Regulator may carry out investigations as needed


Fraud – Introduction Fraud – Introduction Primary responsibility for prevention and

detection of fraud (and error) rests with management and those charged with governanceGood control environment Risk assessment procedures Implementation, operation, and monitoring of IC

system

Auditor’s responsibility Consider fraud when assessing risk of material

misstatement Respond to assessed, identified, or suspected risk Able to express audit opinion at acceptable level of

audit risk



Terminology Terminology Error

◦Unintentional act which leads to misstatement of AFS

Fraud ◦Intentional act, in order to obtain unfair

illegal advantage ◦Fraud may be committed by

Management Those charged with governance Employees 3rd parties



Terminology Terminology Fraud risk factors

◦Indicate an incentive or pressure to commit fraud, or provide an opportunity to commit fraud

Management fraud ◦Committed by member of management

or person charged with management ◦S45 implications

Employee fraud ◦Committed by employee ◦NO S45 implications



Terminology Terminology 2 Main categories of fraud

◦Fraudulent financial reporting Intentional misstatements, including omissions –

deceive users Perpetrated by management Includes

Falsification of accounting records Management override

◦Misappropriation of assets Embezzlement Theft of physical assets, intellectual property Company pays for goods and services not

received



Auditor’s Responsibilities Auditor’s Responsibilities Requirements in terms of ISA 240

◦Attitude of professional scepticism Even where management has previously acted

with integrity ◦Discussion amongst audit team

Client’s susceptibility to material misstatement due to fraud and error

◦Obtain information identify risk of material misstatement due to fraud and error NB: consider whether any of the information

obtained indicates whether any of the FRAUD RISK FACTORS are present



Auditor’s responsibilities Auditor’s responsibilities

Requirements in terms of ISA 240 ◦Assess the risk of material

misstatement due to fraud and error At FS level At assertion level

◦Determine audit response to address the risk At FS level At assertion level



Auditor’s response to risk Auditor’s response to risk due to fraud due to fraud

At FS level ◦ Assignment and supervision of staff ◦ Consider accounting polices adopted by

management ◦ Element of unpredictability in nature, timing

and extent of audit procedures

At assertion level ◦ Impacts on nature, timing and extent of audit

procedures ◦ Considerations

Attempts to conceal fraud Relevance and reliability of evidence collected




Management override ◦ Auditor must design and perform procedures

to respond to the risk of management override

Evaluation of audit evidence ◦ Is initial assessment of material misstatement

(assertion level) still appropriate after initial procedures have been conducted

◦ Examples Discrepancies in accounting records Conflicting or missing evidence Problematic relationships between auditor and

management




Management representations ◦To include

Management is responsible for IC systems – prevent and detect fraud

Management has disclosed results of its assessment of risk of material misstatement due to fraud

Management has disclosed all frauds involving management and employees

Management has disclosed any allegations of fraud

◦Should only ever be corroborating evidence



Fraud Risk Factors Fraud Risk Factors

Stage of audit◦At the planning stage

Gaining understanding of entity and its environment Gather information to identify the risk of material

misstatement due to fraud

Assessing the risk of material misstatement due to fraud

◦Does the information gathered indicate the presence of the risk factors



Fraud Risk Factors Fraud Risk Factors Consideration of

◦Incentives / pressures On management to report fraudulently On management and employees to

misappropriate assets ◦Opportunities

For management to report fraudulently For management and employees to

misappropriate assets ◦Attitudes / rationalisations

Do attitudes of management and employees indicate Fraudulent reporting Misappropriation of assets


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